Canadian watchdog says banks can withstand major housing downturn

Tue Sep 30, 2014 3:14pm EDT
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By Jeffrey Hodgson

TORONTO, Sept 30 (Reuters) - A recent systemwide stress test confirmed Canadian banks could absorb the hit from a significant downturn in the country's booming housing market, the new head of Canada's banking regulator said on Tuesday.

Jeremy Rudin, who took the top job at Canada's Office of the Superintendent of Financial Institutions in June, said the banking system must be strong enough to cope with the "inherent uncertainty" of the future of the property market.

"Everybody's conscious of the fact that the mistake that some people in the U.S. made was to assume they knew what housing prices were going to do. Our approach is we need to ... have a system that's robust to the fact we don't know," he told reporters in Toronto.

Canada's housing market boomed following the financial crisis, fueled by borrowing costs near record lows. While policymakers and major banks have predicted a soft landing, some commentators have said the situation is a bubble waiting to burst.

At the same time Canadian banks, which avoided the taxpayer-funded bailouts that occurred in the United States, have increased their capital ratios and been repeatedly ranked among the world's soundest.

Rudin said the onus is on lenders to make sure a surge in mortgage lending is sustainable.

"It's the institutions that are responsible. They need to know what their risks are. They need to manage them, measure and manage them, and they need to have enough capital and enough liquidity to support those risks," he said.

Rudin made the comments after his first major policy speech, in which he said Canada's reputation for rigorous regulation has become a competitive advantage for its financial institutions, giving them better access to funding and lower funding costs. (Reporting by Jeffrey Hodgson; Editing by Steve Orlofsky)